Over the past two years, the slump in oil prices has caused a ripple effect along the entire oil & gas value chain. The world is now entering a period of even more volatile oil prices, and, in the midst of these unsettling times, the Oilfield Services and Equipment (OFSE) industry has taken a particularly strong hit. This is largely due to the fact that a slew of major oil producers have planned, introduced, and set in motion cost-cutting initiatives.
The OFSE industry is a very important part of the GCC economy – with a size of about $65bn and almost 7% of the global market. Within the GCC, Saudi Arabia accounts for 40% of the market and is expected to grow the fastest – by about 8% per annum between 2017 and 2020.
Globally, oil companies are making significant cuts to CAPEX: between 10 and 30% of the CAPEX budget has been cut by IOCs and NOCs. From their perspective, oil companies are expecting their service providers to react and are renegotiating contracts with OFSE companies in order to meet their new targets. As part of their efforts to reduce costs and elevate efficiency, IOCs have also radically shifted their strategy from volume to value and this has had a huge impact on the bottom line of OFSE players.
In response to this, OFSE players have reacted accordingly and have significantly reduced their cost base including their workforce. For example, Schlumberger has reduced its global workforce by 26% since November 2014. Moreover, in recent years, the oil & gas industry’s returns have eroded amidst low and stable prices – and this in turn has made investors sceptical of the industry’s ability to create value.
Looking ahead, the offshore industry will continue to serve as a key source of production growth globally. In fact, 62% of new global oil production from now until 2020 will come from offshore – and this will generate an economic value of $65bn. Given this context, OFSE companies will have to reorganise their activities and focus on serving this segment of the industry.
Interestingly, the forces currently shaping the GCC’s OFSE landscape are different from those affecting the global OFSE industry. Across the GCC, energy players are increasingly applying improved and enhanced oil recovery techniques, designed to help them extract the maximum amount of oil from mature fields. OFSE companies are already familiar with this type of activity in other parts of the world and now more than ever they need to bring such expertise to the GCC.
GCC countries are determined to maintain their production capacity – so as to not lose market share. In 2015, mature fields accounted for about 36% of oil companies’ total external spending.
The growth of unconventional oil is also climbing to the top of governments’ agendas. Unconventional oil sources can help GCC countries meet their capacity target. For example, by also producing heavy oil, Kuwait aims to increase its capacity to 4mn bopd by 2020. When it comes to gas production, it is now becoming as vital as crude production. The reality is, government gas price subsidies in several GCC countries has sparked a rise in demand; and so, at present, some GCC countries like Kuwait, Oman and UAE are actually importing gas. Overall, in the GCC, the total spend on gas is expected to grow by 4% over the next 10 years, led by Kuwait and Qatar with 19% and 7% respectively.
Remarkably, an increasingly large amount of oil produced in the GCC is directly used for domestic consumptions. For instance, in Saudi Arabia, as much as 3MMbpd is used for domestic consumption. Consequently, countries such as Saudi Arabia and the UAE are looking to boost their gas production so they can reduce their domestic crude consumption, further expand their exporting activities, and diversify their economies.
With all this in mind, it is clear that the region’s OFSE industry is undergoing a massive transformation – one that has been long in the making. To ensure success in such challenging times, OFSE players must now more than ever carefully and closely monitor regional GCC trends and adapt their operations accordingly.
About the author: Bjorn Ewers is partner and managing director at Boston Consulting Group (BCG) Middle East. BCG is an American management consulting firm with 85 offices in 48 countries globally. The firm advises clients in the private, public, and not-for-profit sectors around the world, including more than two-thirds of the Fortune 500 Companies.
